820 First Street NE, Suite 510
Washington, DC 20002
Tel: 202-408-1080
Fax: 202-408-1056
center@cbpp.org
www.cbpp.org
Updated November 12, 2008
STATE BUDGET TROUBLES WORSEN
By Elizabeth McNichol and Iris J. Lav
States are facing a great fiscal crisis. At least 41 states
faced or are facing shortfalls in their budgets for this and/or
next year. Over half the states had already cut spending,
used reserves, or raised revenues in order to adopt a
balanced budget for the current fiscal year — which started
July 1 in most states. Now, their budgets have fallen out of
balance again. New gaps have opened up in the budgets of
at least 31 states plus the District of Columbia just four
months after they struggled to close the largest budget
shortfalls seen since the recession of 2001. And these
problems are expected to continue into next year.
Current estimates are that mid-year gaps total $24.3 billion
— 6.6 percent of the budgets of the 29 states that have
estimated the size of the gap — but they will almost certainly
widen as the continuing economic turmoil causes revenues
to come in below estimates in more states.
STATE FISCAL STRESS DEEPENS
•
In total, 41 states are facing fiscal
stress in their FY2009 and/or
FY2010 budgets. Because
economic conditions remain
unsettled, it is highly likely that
budget gaps will grow.
•
New mid-year shortfalls have
opened up in the budgets of at least
31 states and the District of
Columbia. Initial estimates of these
mid-year gaps total $24.3 billion.
•
This new round of shortfalls is in
addition to the budget gaps of $48
billion that had to be closed in 29
states in their FY2009 budgets,
adopted a few months ago.
The 31 states facing mid-year shortfalls are Alabama,
Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois,
Kansas, Kentucky, Maine, Maryland, Massachusetts, Mississippi, Nevada, New
Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina, Tennessee, Utah, Vermont, Virginia, and Wisconsin. In
addition, the District of Columbia faces a budget shortfall. These budget gaps are in addition to
the shortfalls that these and other states faced as they adopted their budgets for the current fiscal
year.1 At that time, 29 states faced a total of more than $48 billion in combined shortfalls.2
Of these states Colorado, Hawaii, Idaho, New Mexico, Pennsylvania and Utah did not also face shortfalls before
adopting FY2009 budgets.
1
For more detail see the Appendix of this paper and 29 States Faced Total Budget Shortfall of At Least $48 billion in
2009 available at http://www.cbpp.org/1-15-08sfp.htm.
2
FIGURE 1
In general, states closed these budget gaps through some combination of spending cuts, use of
reserves, or revenue increases when they adopted a fiscal year 2009 budget.
Recent data on state tax collections confirm the mounting fiscal problems of the states. In the
first half of 2008, most states experienced flat or declining revenues relative to the previous year.
The most recent indications are that revenues are continuing to weaken significantly.
The states’ fiscal problems are likely to continue for some time. At least 21 states have looked
further ahead and prepared projections of revenues and/or spending for fiscal year 2010 and beyond
that foresee continued fiscal distress. These 21 states include fifteen of the states projecting midyear gaps for the current fiscal year — Alabama, Arizona, California, Connecticut, Florida, Hawaii,
Kansas, Maine, Maryland, Nevada, New York, North Carolina, Vermont, Virginia, and Wisconsin
— as well as Louisiana, Minnesota, Missouri, Oregon, Rhode Island and Washington.3 It may be
particularly difficult for states to recover from the current fiscal situation, suggesting that there will
be multi-year fiscal distress. Housing markets may be slow to fully recover; the decline in housing
markets has already depressed consumption and sales taxes as people refrain from buying furniture,
appliances, construction materials, and the like. Property tax revenues are also beginning to be
affected, and local governments will be looking to states to help address the squeeze on local and
The list of states at risk for budget problems in fiscal year 2010 is very likely larger than these 21 states. Most states do
not regularly prepare projections of the amount of spending that would be needed to maintain existing services —
current services spending — so it is difficult to determine whether projected revenues are sufficient to cover the future
cost of existing programs.
3
2
TABLE 1: STATES WITH MID-YEAR FY2009 BUDGET GAPS
Size of Gap
Alabama
Arizona
California
Colorado
Connecticut
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Kansas
Kentucky
Maine
Maryland
Massachusetts
Mississippi
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
Ohio
Pennsylvania
Rhode Island
South Carolina
Tennessee
Utah
Vermont
Virginia
Wisconsin
TOTAL
$458 million
$700 million
$9.5 billion
$99 million
$300 million
$131 million
$1.7 billion
$1.6 billion
$162 million
$174 million
DK
$137 million
$294 million
$150 million
$248 million
$1.4 billion
$24 million
$575 million
$50 million
$400 million
$253 million
$1.5 billion
$800 million
$540 million
$565 million
$372 million
$554 million
$300 million
$354 million
$24 million
$974 million
DK
$24.3 billion
Percent of FY2009 General
Fund
5.5%
7.0%
9.4%
1.3%
1.7%
2.1%
6.6%
7.5%
2.8%
5.9%
2.1%
3.2%
4.9%
1.7%
5.0%
0.5%
7.8%
1.6%
1.2%
4.2%
2.7%
3.7%
1.9%
2.0%
11.4%
8.1%
2.7%
5.9%
2.0%
5.7%
6.6%
Note: An entry of “DK” in Size of Gap means that an estimate of the size of the projected gap in that
state is not yet available.
education budgets. And if the employment situation continues to deteriorate, income tax revenues
will weaken and there will be further downward pressure on sales tax revenues as consumers
become reluctant or unable to spend.
Although fiscal year 2010 does not start until next year, the effects of these upcoming problems
are likely to be felt sooner. For example, the governor of New York called legislators into a special
session in August to make budget cuts designed to reduce projected fiscal year 2010 budget gaps and
Maryland has cut spending this year in part to address projected gaps for the next year.
3
The vast majority of states cannot run a deficit or borrow to cover their operating expenditures.
As a result, states have three primary actions they can take during a fiscal crisis: they can draw down
available reserves, they can cut expenditures, or they can raise taxes. States already have begun
drawing down reserves; the remaining reserves are not sufficient to allow states to weather a
significant downturn or recession. The other alternatives — spending cuts and tax increases — can
further slow a state’s economy during a downturn and contribute to the further slowing of the
national economy, as well.
Some states have not been affected by the economic downturn but the number is dwindling.
There are a number of reasons why. Some mineral-rich states — such as New Mexico, Alaska, and
Montana — saw revenue growth as a result of high oil prices. However, the recent decline in oil
prices has begun to affect revenues in some of these states. The economies of a handful of other
states have so far been less affected by the national economic problems.
In states facing budget gaps, the consequences sometimes are severe — for residents as well as the
economy. Unlike the federal government, states cannot run deficits when the economy turns down;
they must cut expenditures, raise taxes, or draw down reserve funds to balance their budgets. As a
new fiscal year begins in most states, budget difficulties are leading some 25 states to reduce services
to their residents, including some of their most vulnerable families and individuals.4
For example, at least 17 states have implemented or are considering cuts that will affect lowincome children’s or families’ eligibility for health insurance or reduce their access to health care
services. Programs for the elderly and disabled are also being cut. At least 15 states are cutting
medical, rehabilitative, home care, or other services needed by low-income people who are elderly or
have disabilities, or significantly increasing the cost of these services.
At least 16 states are cutting or proposing to cut K-12 and early education; several of them are
also reducing access to child care and early education, and at least 21 states have implemented or
proposed cuts to public colleges and universities.
In addition, at least 10 states have proposed or implemented reductions to their state workforce.
Workforce reductions often result in reduced access to services residents need. They also add to
states’ woes by contracting the state economy.
If revenue declines persist as expected in many states, additional budget cuts are likely. Budget
cuts often are more severe in the second year of a state fiscal crisis, after reserves have been largely
depleted and thus are no longer an option for closing deficits. The experience of the last recession is
instructive as to what kinds of actions states may take. Between 2002 and 2004 states reduced
services significantly. For example, in the last recession, some 34 states cut eligibility for public
health programs, causing well over 1 million people to lose health coverage, and at least 23 states cut
eligibility for child care subsidies or otherwise limited access to child care. In addition, 34 states cut
real per-pupil aid to school districts for K-12 education between 2002 and 2004, resulting in higher
fees for textbooks and courses, shorter school days, fewer personnel, and reduced transportation.
For more detailed information see Facing Deficits, Many States are Imposing Cuts that Hurt Vulnerable Residents
http://www.cbpp.org/3-13-08sfp.htm.
4
4
Expenditure cuts and tax increases are problematic policies during an economic downturn
because they reduce overall demand and can make the downturn deeper. When states cut spending,
they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses
and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In
all of these circumstances, the companies and organizations that would have received government
payments have less money to spend on salaries and supplies, and individuals who would have
received salaries or benefits have less money for consumption. This directly removes demand from
the economy. Tax increases also remove demand from the economy by reducing the amount of
money people have to spend.
The federal government — which can run deficits — can provide assistance to states and
localities to avert these “pro-cyclical” actions.
States Have Restrained Spending and Accumulated Rainy Day Funds
Many states have never fully recovered from the fiscal crisis in the early part of the decade. This
fact heightens the potential impact on public services of the deficits states are now projecting.
State expenditures fell sharply relative to the economy during the 2001 recession, and for all states
combined they remain below the FY2001 level. In 18 states, general fund spending for FY2008 —
six years into the economic recovery — remained below pre-recession levels as a share of the gross
domestic product.
In a number of states the reductions made during the downturn in education, higher education,
health coverage, and child care remain in effect. These important public services were suffering
even as states turned to budget cuts to close the new budget gaps. Spending as a share of the
economy declined in FY2008 and is projected to decline further in FY2009.
One way states can avoid making deep reductions in services during a recession is to build up
rainy day funds and other reserves. At the end of FY2006, state reserves — general fund balances
and rainy day funds — totaled 11.5 percent of annual state spending. Reserves can be particularly
important to help states adjust in the early months of a fiscal crisis, but generally are not sufficient to
avert the need for substantial budget cuts or tax increases.
Federal Assistance Needed
Federal assistance can lessen the extent to which states take pro-cyclical actions that can further
harm the economy. In the recession in the early part of this decade, the federal government
provided $20 billion in fiscal relief in a package enacted in 2003. There were two types of assistance
to states: 1) a temporary increase in the federal share of the Medicaid program; and 2) general grants
to states, based on population. Each part was for $10 billion. The increased Medicaid match
averted even deeper cuts in public health insurance than actually occurred, while the general grants
helped prevent cuts in a wide variety of other critical services. The major problem with that
assistance was that it was enacted many months after the beginning of the recession, so it was less
effective than it could have been in preventing state actions that deepened the economic downturn.
5
The federal government should consider aiding states earlier, rather than waiting until the downturn
is nearly over.
Moreover, it seems increasingly likely that this recession will be more severe than the last
recession, and thus state fiscal problems may be worse. For instance, unemployment, which peaked
after the last recession at 6.3 percent, has already hit 6.4 percent, and many economists expect it to
rise much further, which will reduce state income taxes and increase demand for Medicaid and other
services. And with consumers’ reduced access to home equity loans and other sources of credit,
sales taxes are also likely to fall more steeply than they did in the last recession. These factors
suggest that a new round of fiscal relief should be s larger than was enacted in 2003.
6
TABLE 2: SIZE OF FY2009 BUDGET GAPS
Alabama
Arizona1
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia1
Hawaii
Idaho
Illinois
Iowa
Kansas
Kentucky
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi1
Nevada
New Hampshire
New Jersey1
New Mexico
New York
North Carolina
Ohio1
Oklahoma
Pennsylvania
Rhode Island
South Carolina
Tennessee1
Utah
Vermont
Virginia
Wisconsin
TOTAL
Gap before
budget was
adopted
Additional
mid-year
gap
$784 million
$1.9 billion
$107 million
$22.2 billion
$458 million
$700 million
$150 million
$217 million
$96 million
$3.4 billion
$245 million
$1.8 billion
$350 million
$266 million
$124 million
$808 million
$1.2 billion
$472 million
$935 million
$90 million
$898 million
$200 million
$2.5 billion
$4.9 billion
$733 million
$114 million
$430 million
$250 million
$468 million
$59 million
$1.2 billion
$652 million
$47.6 billion
$9.5 billion
$99 million
$300 million
$131 million
$1.7 billion
$1.6 billion
$162 million
$174 million
Yes, DK size
$137 million
$294 million
$150 million
$248 million
$1.4 billion
$24 million
$575 million
$50 million
$400 million
$253 million
$1.5 billion
$800 million
$540 million
$565 million
$372 million
$554 million
$300 million
$354 million
$24 million
$974 million
Yes, DK size
$24.3 billion
Total
Total Gap as
Percent of
FY2009 General
Fund
$1.2 billion
$2.6 billion
$107 million
$31.7 billion
$99 million
$450 million
$217 million
$227 million
$5.1 billion
$1.8 billion
$162 million
$174 million
$1.8 billion
$350 million
$137 million
$560 million
$274 million
$1.1 billion
$2.6 billion
$472 million
$935 million
$114 million
$1.5 billion
$250 million
$2.9 billion
$253 million
$6.4 billion
$800 million
$1.3 billion
$114 million
$565 million
$802 million
$804 million
$768 million
$354 million
$83 million
$2.2 billion
$652 million
$71.9 billion
15.0%
25.9%
2.4%
31.4%
1.3%
2.6%
6.0%
3.6%
19.9%
8.7%
2.8%
5.9%
6.3%
5.5%
2.1%
6.0%
9.0%
7.0%
9.2%
4.8%
5.4%
2.2%
20.1%
8.0%
8.9%
4.2%
11.4%
3.7%
4.5%
1.7%
2.0%
24.5%
11.7%
6.8%
5.9%
6.8%
12.8%
4.6%
12.2%
1
Only the low end of the estimated FY09 gap for these states — ones that provided a range of
estimates — is shown in this table. For more detail see 29 States Faced Total Budget Shortfall of
At Least $48 billion in 2009 available at http://www.cbpp.org/1-15-08sfp.htm.
7
TABLE 3 – SOURCE OF MID-YEAR GAP ESTIMATES
State
Alabama
Arizona
California
Colorado
Connecticut
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Kansas
Kentucky
Maine
Maryland
Massachusetts
Mississippi
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
Ohio
Pennsylvania
Rhode Island
South Carolina
Tennessee
Utah
Vermont
Virginia
Wisconsin
Source
Executive budget office, press reports of education fund shortfall
Joint Legislative Budget Committee
Press reports
Governor’s office
Office of Fiscal Analysis
Chief Financial Officer
Revised revenue projections
Press reports of Governor’s presentation
Press reports of Treasurer’s presentation to the state legislature
Revised revenue projections
Press reports
Legislative Research Department
State budget director
Press reports of Maine Revenue Service presentation
Revised revenue projections
Governor’s office
Governor’s office
State Economic Forum lowered revenue projections
Budget Director
Governor’s office
Revised revenue projections
Division of Budget
Press reports
Press reports of governor’s statements
Governor’s office
Press reports of House Finance Committee presentation
State Budget and Control Board
Comptroller’s office
Governor’s special session call
Revised revenue projections
Governor’s office
Governor’s office
For source information for the original shortfall estimates, see 29 States Faced Total Budget Shortfall of At
Least $48 billion in 2009 available at http://www.cbpp.org/1-15-08sfp.htm.
8